The Means Test

Bankruptcy attorney Sina Maghsoudi helps individuals under financial stress regain control of their life through the help offered by Chapter 7 or Chapter 13 bankruptcy. An initial step in determining which type of bankruptcy is right for you is the completion of a means test required for Chapter 7 eligibility.

Why the Means Test?

The government would rather see people file Chapter 13 bankruptcy instead of Chapter 7, as it involves the partial repayment of financial obligations rather than the extinguishing of debt at the expense of the creditor. Congress has enacted many changes to make Chapter 13 a more attractive option, such as providing a permanent way to save your home from foreclosure through Chapter 13. Another recent change involves establishing a means test for Chapter 7, so that those with very high incomes will not be eligible to file Chapter 7.

What is the Means Test?

The means test comes into play if your monthly income exceeds the state median income. If your income is below the state median, you qualify for Chapter 7 without any further testing. In 2014, the median income in California is about $50,000 for a single wage earner. Adjustments are made for each additional family member.

Even if your income is above the state median, you may still qualify for Chapter 7, but further testing is required. This test involves a complex set of calculations that take into account your “current monthly income” and the amount of your “allowed” monthly expenses to arrive at your “disposable income.” This figure must be below a certain amount in order to qualify for Chapter 7 eligibility. The exact type and amount of allowable expenses varies from county to county.

What if I fail the means test?

If you fail the means test, you can still file for Chapter 13. Failing the means test is one way of saying that you probably have enough disposable income each month to afford a payment plan to repay your debts. Chapter 13 has distinct advantages over Chapter 7, such as allowing you to save your home from foreclosure, and being removed from your credit report years earlier.

It Starts with a Phone Call

If your finances have spiraled out of control and you are uncertain of your options, contact our office for a free initial consultation. We can help you determine if bankruptcy is right for you, including whether you pass the means test for Chapter 7 eligibility. If you are in Southern California and need bankruptcy advice or representation, call The Law Office of Sina Maghsoudi.